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Slovenia aims to nip debt doubts with auction, buyback

By Marja Novak and Michael Winfrey

LJUBLJANA (Reuters) - Slovenia, struggling to avoid following Cyprus into a bailout, announced plans on Thursday for the early rollover of debt maturing in June, a move that could calm markets and thwart a squeeze on its finances.

But in a decision that underscored concern over the three-week-old government's commitment to reforms, parliament postponed a vote on a "golden rule" seen as a condition if the nation of 2 million people wants to seek aid from its euro zone partners.

Criticized in reports from international institutions this week and facing investor frustration over unclear plans to clean up its banks and cut its budget deficit, Slovenia has watched its borrowing costs jump since the Cyprus's messy rescue.

Slovenia was the first state to break away from the former Yugoslavia in the 1990s, but failed to follow other ex-Communist European Union states in privatizing its biggest banks. Political influence and bad management have piled up a bad loan burden that some investors fear is too big for the country to manage alone.

At the heart of the matter have been conflicting statements from officials over whether Slovenia had enough cash to roll over a large tranche of debt maturing in June and stay afloat.

The Finance Ministry said it would try to refinance the debt early with an auction of around 500 million euros worth of 18-month treasury bills on April 17.

At the same time, it said it would offer to buy back 855 million euros in June 6 bills at 99.525 percent of their face value.

Analysts said the operation - probably agreed ahead of time with Slovenia's mostly state-owned banking sector - could give the markets more time to calm down following Cyprus's rescue.

"The government seems to be trying to roll over the debt prematurely so as to postpone the need for a bond issue until autumn," said Andraz Grahek of corporate finance advisers Capital Genetics.

"I expect the issue will succeed but it will be mostly domestic banks that will purchase it while the interest rate is likely to be higher."

The maturing bills carry interest of 3.99 percent.

Grahek said the auction may also explain why the ministry sold only about half the 100 million euros in short-term paper it has aimed for in an auction this week, in which yields on 1 year bills jumped by half to 2.99 percent, because the banks were anticipating the new sale.

The government needs about 3 billion euros this year to recapitalize state-owned banks, repay maturing debt and cover the budget deficit.

But yields on its 10-year benchmark bond rose to 6.48 percent on Thursday - closer to the 7 percent threshold at which a country's finances can become unsustainable - from 4.77 percent on March 15, the day before the Cyprus bailout deal.

GOLDEN RULE POSTPONED

On Wednesday, the European Union's executive Commission issued a "wake-up call" to Slovenia, Spain and other countries over their failure to bring their budget deficits in line with the bloc's prescribed norms.

It followed a critical report from the OECD club of wealthy states that said Ljubljana may have underestimated the cost of the clean-up of its three biggest banks - all state owned - that the IMF estimates will cost up to 1 billion euros this year.

The government is also mulling austerity measures and a "golden fiscal rule", which all euro zone members have to enforce by the end of the year and which would require governments to achieve a nearly balanced structural budget.

Passing the law would send a positive signal to markets, analysts said, but Prime Minister Alenka Bratusek said parties had not yet agreed on the year that it should take effect and postponed a vote planned for Thursday until May 7.

The center-right opposition has suggested 2015, but parties in the four-member ruling coalition, which have resisted spending cuts, have suggested they want more time.

Slovenia's budget deficit was 3.7 percent of annual output in 2012, above the EU's 3 prescribed percent ceiling.

Slovenia's European Central Bank Governing Council Member, Marko Kranjec, said it would be possible for Slovenia to avoid a bailout, but the "ball is in the government's court."

"The situation of course is serious and it is the government that has to take steps to give very clear signals that they are serious," he told Marketnews in Dublin. "And if they do it I believe it will be possible to get out without any program."

(Reporting by Marja Novak; writing by Michael Winfrey; editing by Ruth Pitchford)

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